Import and Export Letters of Credit

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What are import and export letters of credit?

Import letters of credit

An import letter of credit is given by the buyer's (importer's) bank on behalf of the buyer to guarantee payment to the seller (exporter). It serves as a commitment by the buyer's bank to make payment to the seller when compliant documents are presented. The import letter of credit guarantees that the seller will receive payment for the shipped goods, as long as they comply with the terms and conditions specified in the letter of credit. The buyer's bank acts as a mediator, verifying the documents and making the payment to the seller.

Export letters of credit

An export letter of credit is given by the buyer's (importer's) bank for the benefit of the seller (exporter). It guarantees payment to the seller when compliant documents are presented. The export letter of credit ensures that the seller will be paid for the goods shipped, as long as they comply with the terms and conditions specified in the letter of credit. The seller's bank acts as a mediator, verifying the documents and facilitating the payment from the buyer's bank.

How import and export letters of credit can help your business

Less risk

Letters of credit can reduce the payment risk involved in international trade. For example, adding confirmation to the document can remove the risk of non-payment and associated country risks.

More flexibility, more confidence

Export letters of credit can guarantee payment and help you build trust with an international business partner. They can also improve your cash flow and payment terms.

Control the process

With letters of credit, you can know exactly when you’ll be paid and what the terms will be before shipment.

Interested in import or export letters of credit?

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Frequently asked questions

No. A letter of credit allows a financial institution to act as a middle party for a transaction. It is a mechanism for securing payment and performance obligations. It is a guarantee from a credit-worthy financial institution.

This type of letter of credit is negotiated as the payment term in a contract between buyer and seller. Any client negotiating to pay or be paid using a letter of credit must have a good understanding of what it is, how it works, the risks, the flow of the transaction and what information is needed by their bank to facilitate as the meditator.

It starts with a conversation between you and your financial institution. (If that’s us, great! Reach out to your usual ATB contact or use the information below.)

Please note that you’ll need an authorized credit facility for the full amount of the letter of credit or guarantee.

Under an import letter of credit, these documents are typically required:

  1. Commercial invoice: provides details of the goods being shipped, including the description, quantity, unit price, total value and any applicable trade terms (also known as International Commerce Terms, or Incoterms®).
  2. Bill of lading: a transport document issued by the shipping company or carrier. It’s evidence of the shipment of goods and includes details like the name of the vessel, port of loading, port of discharge, and the consignor and consignee.
  3. Packing list: provides a detailed breakdown of the contents of each package or container, including the quantity, weight and dimensions of each item. It helps verify the accuracy of the shipment and aids in customs clearance.
  4. Insurance certificate: if the buyer needs insurance coverage for the goods during transit, an insurance certificate or policy is required. It provides evidence of insurance coverage and specifies the risks covered and the insured value.
  5. Certificate of origin: certifies the country of origin of the goods. It may be required for customs purposes or to comply with specific trade agreements or regulations.
  6. Inspection certificate: in some cases, an inspection certificate may be required to verify the quality, quantity or conformity of the goods. It’s issued by an independent inspection agency or a designated authority.
  7. Other documents: depending on the specific requirements of the letter of credit or the nature of the goods being imported, additional documents may be required. These can include certificates of analysis, phytosanitary certificates, health certificates or any other relevant documents. The documents required by an import letter of credit can vary depending on factors including the nature of the goods, the terms and conditions of the letter of credit, and any specific requirements of the buyer or the importing country. It’s essential for the importer to carefully review the letter of credit and communicate with the exporter to confirm that all required documents are provided accurately and on time.

Letter of credit costs depend on a number of variables. We’ll make sure our clients know the cost before a transaction is settled.

“Documentary letters of credit” is an umbrella term for both export and import letters of credit. That is, an export letter of credit and an import letter of credit are both types of documentary letters of credit.

An import letter of credit is issued by the buyer’s financial institution, which means the bank will pay the exporter if the buyer does not pay on time. An export letter of credit is an import letter of credit received by the seller’s bank.

A documentary letter of credit (also known as a commercial or payment letter of credit) is issued by a buyer of an international product or service. The buyer and seller will negotiate which documents must be presented to the issuing financial institution to release payment to the seller. These documents may include, but are not limited to:

  • Commercial invoice (proof of value, bill of lading or proof of shipment)
  • Packing list (proof of packing), or inspection certificate (proof of quality)
  • Insurance certificate (proof of insurance)

All conditions of payment will be in the letter of credit. The letter of credit (LC) protects the seller as a guarantee for payment moves from the buyer to the buyer’s bank once the LC is issued. The LC also protects the buyer as the issuing financial institution will hold funds until documents are received from the seller. When a seller makes a demand that complies with the letter of credit, the financial institution is obligated to pay.

A standby LC acts as a form of security for a future performance or financial obligation. Whether the LC is called or not depends on whether the issuer has performed or paid the financial obligation. This type of LC “stands by” if or when a beneficiary demands on the instrument. Like a documentary LC, when a beneficiary makes a complying demand, the financial institution is obligated to pay.

If you receive an export letter of credit, then you’re the exporter and therefore should get paid under the letter of credit. When you’re ready, you’ll present the required documentation to ATB according to the instructions on the letter of credit and ATB will send those documents to the issuing bank. Upon reviewing, if the issuing bank considers the documents correct, they will wire the funds to ATB.

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